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Wednesday, October 15, 2003

China Envy at Fever Pitch?

Some plusses and some minuses in this article by William Pessek in Bloomberg. India never was a 'basket case' for anyone with eyes. India's 'moment of opportunity' is not just a moment either. But at the same time we may not be all the way in yet. Growth in the IT sector is spectacular, but India is enorous and poor. 700 million people live in the villages of rural India, and, although the birthrate is coming down fast, population momentum means that the numbers will keep going up for some time to come. How to cushion this rise, this is India's big problem, and it seems to be all to do with the balance between the rural and the urban. And remember, even if GDP is rising fast, it could be some time yet before per capita incomes really start to rise. ( Thanks to Rueben at the zoo station for the link).

China-envy is reaching a fever pitch as nations struggle to compete with the world's most dynamic economy. The China-all-the-time mindset is making it difficult forothers in Asia to get attention. Nowhere is that truer than India. Even though Asia's third biggest economy may grow more than 7 percent this fiscal year, India is struggling to get onto more executives and investors radar screens. Those who ignore India may regret it. "The India story is a good story and it's likely to get even better", says Rajeev Malik, an economist at J.P. Morgan Chase &Co. Granted, India is getting more headlines as stocks rise, bond yields grind lower and the currency, the rupee, appreciates. Its benchmark stock index is up 49 percent this year in U.S. dollar terms, shining a brightening spotlight on one of the world's fastest-growing economies.

Yet many of India's attributes are being taken for granted, especially among corporate executives. Asking about different economies in Asia, you often get similar answers. China's economy? "Oh yes, we're excited about it", investors say. Japan? "Looking better." Thailand and Indonesia? "Sure, we're paying attention." And India?"Hmmm, well we've got big concerns about the place."

China bulls aren't necessarily wrong. The most populous nation has remarkable potential and its meteoric rise spotlights India's economic backwardness. Twenty years ago, India and China were close competitors, both struggling to pull their mushrooming populations out of poverty. Now India is being left behind. Ignoring India's long-run potential, however, could be one of the biggest mistakes executives and institutional investors make in the next decade. India has myriad problems. Even if the country grows the 7.1 percent groups like the National Council for Applied Economic Research expect, it may not be fast enough to raise 400 million of its 1 billion people out of poverty. New Delhi says it needs 8 percent growth over the next decade to do that. Dodgy infrastructure and notorious bureaucracy continue to steer away the kind of long-term investment China gets loads of.

Yet India is no longer a basket case, and it's likely to be one of the great investment surprise stories of the next decade. There's a reason Boeing Co., Motorola, Australian phone company Telstra Corp. and Accenture Ltd., which manages services and computers for clients including AT&T Corp., have all announced investments in India in the last 12 months. Its appeal lies as much in its pool of software engineers and English-speaking graduates as its billion-person market.

Southeast Asia also is eying India's promise. Last year, India got its first invite to the annual summit of Association of Southeast Asian Nations (ASEAN), yet Prime Minister Atal Bihari Vajpayee played second fiddle to Chinese officials. At last week's summit, Vajpayee was signing trade agreements with ASEAN. Where India has an advantage over China is the nature of its economy. China's is a political one and its success comes from a top-down approach to things. India, for all its problems, is a bottom-up economy in which entrepreneurs are pushing the government to reform and streamline. That tension could give India an edge in the long run. China's boom isn't hollow, per se, but it's heavily dependent on foreign direct investment (FDI); the economy mostly serves the demands and needs of foreign-owned firms in foreign markets. It explains the dearth of internationally known Chinese companies that operate on a global scale and market their products abroad. You would be hard pressed to find a global investor who hasn't heard of Indian software firms like Infosys Technologies Ltd. or Wipro Ltd. Ditto for drugmakers like Ranbaxy Laboratories Ltd. and Dr. Reddy's Laboratories Ltd. The presence of such names explains why India is attracting increased institutional investment, while China isn't.

The question is how much China's rise shakes India out of complacency and catalyzes officials to modernize the economy. Privatization Minister Arun Shourie, whose progress in selling state assets has impressed many investors, warns that China's economy could surpass India's by six times over the next 15 years if the current pace of reform continues. Shourie argues that India's improving growth environment offers a "moment of opportunity" but "only a moment." It's an important point. New Delhi's bureaucracy gets in the way of that opportunity. Entrenched bureaucrats resist change because of political differences, not sound economics. While that's true anywhere, not every nation is dealing with such crushing poverty. Once India begins attracting more foreign direct investment, its comparative advantages over China "like entrepreneurial and management skills" might be reinforced and boost Indian growth. "Countries in Asia seem to be fighting for a shrinking FDI pool," says Gene Frieda, a strategist at the Royal Bank of Scotland. "That won't last forever, though." One sign of hope is the rupee's rise. It indicates a sense of economic maturity and confidence. It's attracting capital into Indian markets, boosting stocks, reducing interest rates and allowing the central bank to keep borrowing costs low. It also is prompting the government to step up plans to repay more high-cost overseas debt before it matures. China is going places, but so is India.
Source: William Pessek Jr, Bllomberg
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Claus and Edward's "Baker's Dozen"

Claus Vistesen and Edward Hugh are proud and happy to announce that they are now working as "featured analysts" with a new Boston-based start-up - Emerginvest.

Claus and Edward have used a new, updated, methodology in order to identify a group of 13 emerging economies which we consider are going to outperform both the rest of the emerging economy group and the OECD economies in terms of a number of key performance indicators over the 2008 - 2020 horizon.

Through our association with Emerginvest we hope to develop performance indicators which will confirm both the relevance and validity of the selection procedure adopted.

We would like to point out that we have absolutely no financial connection whatsoever with Emerginvest - although we do heartily endorse what they are trying to do.

In particular we see the move by the investment community towards emerging markets as one of the most effective and direct ways to address those issues of inter-country wealth and income imbalances which have plagued our planet for so long now - namely by getting the money from the rich who have it to the poor who need it.

Sending investment to emerging economies is also a way of addressing the underlying imbalances which exist between the relatively older populations of the developed economies who increasingly need to save, and the relatively younger emerging economies who can benefit from the investment of those savings in their countries. So in a way you can both ensure the future of your own pension and help attack poverty at one and the same time. This type of possibility is normally known in economics as "win-win".

The oldest known source and most probable origin for the expression "baker's dozen" dates to the 13th century in one of the earliest English statutes, instituted during the reign of Henry III (r. 1216-1272), called the Assize of Bread and Ale. Bakers who were found to have shortchanged customers could be liable to severe punishment. To guard against the punishment of losing a hand to an axe, a baker would give 13 for the price of 12, to be certain of not being known as a cheat. Specifically, the practice of baking 13 items for an intended dozen was to prevent "short measure", on the basis that one of the 13 could be lost, eaten, burnt or ruined in some way, leaving the baker with the original dozen.

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About Claus

Claus Vistesen is a 23 year old macroeconomist who is on the point of finishing his MSc in Applied Economics and Finance from the Copenhagen Business School. His primary research interests are international finance and international macroeconomics. Claus is especially interested in how the changing structure of global and national demographics impacts on local macroeconomic performance. Moreover - and as the wonk he ultimately is - he also takes a considerable interest issues and methodologies associated with econometrics, and this is an interest he intends to develop in his postgraduate research.

About Edward

Edward 'the bonobo' is a Catalan macroeconomist and economic demographer of British extraction, now based in Barcelona. By inclination he is a macroeconomist, but his deep-seated obsession with trying to understand the economic impact of contemporary demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

He is currently working on a book with the provisional working title "Population, the Ultimate Non-renewable Resource".